EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

NY Offers Billions in Energy Incentives Commencing in 2014

NY-Offers-Billions-in-Energy-IncentivesIn an unprecedented effort to reduce
energy costs, four different New York sponsors have each
recently announced separate large-scale programs aimed at
reducing New York’s energy consumption. The programs are
as follows:

2.) The NY-Sun Initiative
creates $1 billion in incentives for ratepayers to incorporate
solar capabilities into their electrical systems.

3.) Consolidated Edison
Inc.’s plan involves saving $1billion by foregoing the
construction of a major power plant to keep pace with the
accelerating demand.

4.) Mayor de Blasio’s $1
billion dollar energy efficiency plan involves upgrading NYC
public buildings to make them energy efficient and encouraging
similar upgrades within the private sector.

These programs exemplify an exciting strategy
- instead of pouring money into outdated technologies to keep up
with demand, reducing the demand may be a more optimal long-term
strategy (For more information on up keeping the NYC electricity
demand see “R&D Tax Credits for Increased U.S. Electrical
Utility Industry Innovation”)

New York has the highest major market energy
costs in the nation. The four initiatives aim to encourage
taxpayers to update their electrical and lighting systems in
order to bring costs down. The substantial government
incentives, coupled with the energy cost savings from upgrades,
provides a compelling, favorable economic return for applicable
energy projects. For example, with the new Green Bank
initiative, not only will ratepayers end up saving money in the
long-run, but they will now have access to financing for their
projects in order to avoid the initial cost outlay.

This article contains four major sub-sections
that describe each of the new 1 billion dollar programs and a
fifth section that describes the corresponding tax savings.

NY Green Bank

The state-wide New York Green Bank (NYGB)
seeks to use regulatory power to encourage energy efficiency
improvements and expand the efficient energy market.
Largely, the initiative does this by making lending for energy
efficient improvements more accessible. Currently, many
areas of the energy efficiency market are limited by a lack of
financing. The Green Bank serves to remedy this problem by
establishing a secondary market for receivables drawn by energy
efficiency borrowers. With this in place lenders will be
more willing to offer financing.

Capitalization of the bank will come from New
York State ratepayers. However, rates will not
increase. The funds will result entirely from a
reallocation of existing funds previously uncommitted to other
programs. Still, some ratepayers argue that this will
result in the government shifting wealth by choosing to support
businesses whose loans it backs with money from
ratepayers. The government’s response is that most
projects it backs will involve power generation, not a
particular economic sector. With power generation, the
city argues, the benefits received by the power generators are
passed down to the ratepayers in the form of lower rates.

Whatever the case, the $1 billion investment
in capital will have a multiplier effect of billions more in
lending at the retail bank/investor/developer level since the
lenders that are actually funding projects will still need to
invest their own capital. In other words, the $1 billion
investment only serves to support the small percentage of loans
that will actually result in a default.

The government can encourage widespread
lending for energy efficient upgrades through this multiplier
effect which will result in substantial energy systems upgrades
throughout the city. Early projections suggest that the $1
billion capitalization could produce as much as $8 billion of
additional, private sector, investment in clean energy projects
over the next ten years. With this, the city believes it
will be able to reduce the cost of electricity to the ratepayers
by increasing the efficiency of production while decreasing the
overall demand.

The emerging efficient energy market is a
large one; in order to be successful moving forward, the
financing of the industry needs to overcome several
barriers. The chart below demonstrates the total market
value of unrealized opportunities for New York based projects
over the next ten years.

Selected Technologies

Estimated Market Size (Billions)

10-Year Horizon

Energy Efficiency

$55

Solar PV

$13

Combined Heat &
Power (CHP)

$8

Biomass

$4

Onshore Wind

$4

Anaerobic Digesters

$1

Total

$85

Note: *This chart excludes potential for
utility scale generation, fuel cells, charging stations, energy
storage, solar hot water systems, and other emerging clean
energy tech and fails to account for further technology
improvements.**Analysis is based on the New York Green
Bank Business Plan

The NYGB initiative attempts to expand the
efficient energy market by providing loan loss reserves and
assuming some of the default risk associated with clean energy
loans or leases in return for a risk-appropriate fee. For
example, one potential credit enhancement solution would be
accelerating expansion of the residential market for clean
energy by providing support to a financial institution in
connection with a pool of clean energy loans or leases.
This would enable the pool to include consumers whose FICO
scores are below those currently served in the market. A
similar credit enhancement strategy could work in the commercial
sector by expanding market access for economic clean energy
projects for the next most creditworthy tier of commercial
end-users.

Eligible InvestmentsNYGB generally targets projects that use the
same technologies that drive carbon reduction and other public
benefits contemplated under existing New York State clean energy
policies. NYGB does not expect to provide capital directly
to companies for funding of their general business operations or
project (pre-construction phase) development capital. It
simply acts as a secondary buyer of energy investment
bundles. In constructing its portfolio, NYGB includes
consideration of scalable, mature renewable and energy
efficiency technologies that are yet to be deployed in
commercial markets (e.g., electric vehicle infrastructure,
biomass, anaerobic digester gas systems, offshore wind, and fuel
cells). Ideal projects are those opportunities which are
“near frontier”, essentially, those which are one standard
deviation away from where financing markets are today.

In evaluating qualifying investment
opportunities, NYGB makes two general considerations:

1. The unique benefit NYGB
brings to the proposed financing arrangement; and2. If any proposed project:

i. Would
likely not occur given the current state of the private
markets; or
ii. Might occur in the private markets but:

•
Would likely involve less favorable terms as the tenor,
cost, fees and other key transaction attributes: or
• Would likely not happen at the
market breadth needed to scale the sector.

Many of the anticipated Green Bank
Investments will involve solar power, a technology which is
currently falling short of its market breadth potential in New
York in part due to the lack of sufficient financing.
Along with the NYGB, the state hopes to stir activity in this
technology sector with the $1 billion funding of the NY-Sun
Initiative and the associated 30% solar tax credit which is
crucial to that program as discussed below.

NY-Sun Initiative

NY-Sun is part of Governor Andrew M.
Cuomo’s commitment to protect the environment and lower energy
costs for all New Yorkers by improving the efficiency and
reliability of the electrical grid.
Cuomo launched NY-Sun in 2012 to
increase solar electrical installations in the state. In
April 2014, the Governor made a historic commitment of nearly $1
billion to NY-Sun, which will significantly expand deployment of
solar capacity throughout the state and transform New York’s
solar industry to a sustainable, subsidy-free sector.

NY has redesigned its solar programs
utilizing a Megawatt (MW) Block incentive structure that
provides certainty and transparency to the industry regarding
incentive levels, accounts for regional market differences, and
provides a clear signal to New York industry that the state
intends to eliminate cash incentives in a reasonable time frame
and allows for the elimination of those incentives sooner in
regions where market conditions can support it.

The New York State Energy Research and
Development Authority (NYSERDA) has begun transitioning to the
statewide NY-Sun Initiative, using a Megawatt (MW) Block system,
starting in August 2014 for solar systems up to 200kW in
capacity and in early 2015 for systems larger than 200kW in
solar capacity. The MW Block system allocates MW targets
to three regions – Long Island, Con Edison territory, and
Upstate NY, with each regional block being divided into three
sectors, specifically:

Each region and sector is assigned a series
of MW targets at certain incentive levels, referred to as
blocks. As applications are submitted, incentives are
assigned and the kilowatts associated with the applications are
added together. When the MW target for that block is
reached, the block is closed and a new block, with a new MW
target and a lower incentive level, is started. Once all
of the blocks for a particular region and sector are filled, an
incentive for that region and sector will no longer be offered.

How the MW Block structure works: If the
first Upstate residential block was for 40 MW and the incentive
was $1/watt, once contracts are in place for those 40 MW, the
second Upstate residential block will be made available at a
slightly lower incentive rate – 90 cents/watt. This
decrease in incentives will continue with each new block.

• Con Ed
Territory: 302 MW for residential303
MW for small nonresidential projects • Upstate: 444
MW for residential
451
MW for small nonresidential projects
• Long Island: 122 MW for residential
58 MW for small
nonresidential projects
• MW goals for large non-residential will be
determined for Con Ed
and Upstate regions when these
blocks are launched in 2015.

The funding available for the MW Block
structure for residential and small business (under 200kW) is as
follows:

• Upstate:
$425.5 million
• Con Edison: $197 million
• Long Island: $60 million
• New York Power Authority (NYPA) projects:
$20 million

As of early October 2014, the first
blocks for residential units have been closed throughout all
three regions. Meaning that the incentives for upgrades
are currently slightly lower, being in the second block
range. For non-residential units, block one incentives are
closed throughout the Upstate and Long Island regions.
Block one incentives are still available for NYC non-residential
upgrades, however they are fast-closing. As of October
17th, the block is about 85% full for non-residential units
under 200kw. For the larger non-residential units which
generate over 200kw, the first block incentives will become
available in 2015. (To view progress levels
visit http://ny-sun.ny.gov/For-Installers/Megawatt-Block-Incentive-Dashboard.aspx).

Loan Options For residential customers, loans are
available for up to $13,000, or up to $25,000 with repayment
periods of 5, 10, or 15 years. For small business and
not-for-profit organizations, Participation Loans of up to
$100,000 (half the market interest rate) and On-Bill Recovery
loans of up to $50,000 (at 3% interest) are available with
repayment periods of up to 10 years. Repayments of the loan are
made through monthly charges on your utility bill.
However, monthly payments may not exceed the estimated energy
cost savings from the upgrades, which means the energy savings
will likely cover most or all of your loan payment. With
this fact in mind it would be advantageous to upgrade since in a
worst case scenario you would be paying what you were previously
paying for electricity while taking advantage of the capital
improvement on your building and benefiting from the tax credit
and corresponding depreciation deductions.

Con Edison’s $1 Billion Power Plant
Substation Deferral

In order to meet the projected electricity
demand of 2019 that will result from a growing New York City
population, Con Edison has been faced with a choice to either
construct a $1.1 billion utility substation or force electricity
consumers to power down. Interestingly, the need for the
investment could be substantially reduced through innovative,
less costly alternatives. The Rosenfeld thesis
challenges the conventional belief that energy demand and gross national product work in tandem.

The conventional belief and consensus
logic dictated the continuing need to build more power
plants. However, a group of leading physicists led by
Princeton University physics
professor, Art Rosenfeld, wouldn’t accept conventional
wisdom. Rosenfeld and his colleagues proceeded to put
together an influential Princeton energy study which concluded
that systematic steps to improve energy efficiency could
materially reduce demand. (For more information see "U.S.
Utilities Combine EPAct Tax Savings with the Rosenfeld Curve").
These cost saving alternatives are crucial to the utility
industry’s survival as competing energy sources begin to emerge.
The plan in New York involves investing $100 to $150 million in
programs to reduce electricity consumption and deferring
construction of the substation until 2024. This would
result in net savings for ratepayers of $400 to $500 million.

The plan will offer ratepayers incentives to
install energy saving equipment in their buildings. For
example, the NYC Housing Authority (NYCHA) has recently taken
advantage of the incentives to install an energy-saving building
management system at the East 108th St – Montery Avenue
development in the Bronx. The system, called a Wireless
Energy Module built by Intech21, ensures that the temperature in
all 239 apartments is at the same comfortable level. The
system also gathers information on the electricity usage in each
apartment. This technology will allow the NYCHA to
evaluate electricity usage in order to develop strategies for
savings. Con Edison provided the Housing Authority with a
$42,400 incentive just for the heating portion of the system
alone. Some other incentives for commercial and industrial
customers include those listed below as posted on the Con Ed
website:

Electric & Gas Rebate ProgramsWith this program, businesses can receive
rebates for certain upgrades, including lighting fixtures, LED
exit signs, chillers, packaged HVAC systems, motors, and water
and steam boilers. Many incentives are available for
purchasing and installing specific high-efficiency equipment in
existing facilities.

EligibilityTo participate, the ratepayer must be a Con
Edison commercial or industrial customer in an existing building
who pays the applicable electric or gas System Benefits Charge.

Custom ProgramsPerformance-based incentives are also
available for installing high-efficiency gas and electric
equipment for customized projects that are not covered under the
equipment rebate program. In addition, Con-Ed will pay up to 50%
of costs (with a cap of $67,000) associated with a technical
feasibility study involving potential electric and gas energy
efficiency measures.

Data Center Efficiency ProgramThe Data Center Efficiency Program is a
powerful new partnership that helps data center customers in the
Con Edison service territory reduce their energy usage, save on
operating costs, and cut greenhouse gas emissions through more
efficient use of electricity. Under the new initiative, Con
Edison and NYSERDA will work together to provide data centers
with individualized and targeted technical assistance as well as
funding for energy efficiency projects. Download
the Joint Data Center Efficiency Program Application

Mayor de Blasio’s $1 Billion Dollar Energy
Efficiency Plan

In an effort to reduce energy costs and
the impact of energy production on the environment, NYC is
planning new energy-efficiency standards for all its public
buildings and pressuring private building owners to make similar
improvements. Nearly three-quarters of NYC’s green house
emissions come from energy used to heat, cool, and power
buildings. With this fact in mind an essential component
of New York City’s plan to dramatically reduce emissions
inevitably involves retrofitting its 50,000 plus buildings with
energy efficient technology.

Of these 50,000 plus buildings, slightly more
than 4,000 of them are government owned. Every one of
these 4,000 buildings will be completely updated within the next
ten years. Next year alone, the city will invest $1
billion in this quest. Upgrades will range from changes in
lighting or boiler systems to improvements in solar power
generation capabilities. According to the city’s
estimates, efficiency upgrades will yield over $1.4 billion in
annual savings, a significant step towards a complete transition
away from fossil fuels. The efficiency upgrade initiative
was announced before the United Nations Climate Summit this past
September and involves a pledge to decrease greenhouse gas
emissions by 80% from 2005 levels by 2050.

The chart below demonstrates the declining
GHG emissions from city buildings and projects the continuing
trend:As the United Nations points to the
desired target for developed countries to mitigate the effects
of climate change, New York City is leading the way as the
largest city in the world to make the commitment. This
would help encourage other cities to upgrade their energy
efficiency, as New York initiatives usually drive similar policy
in other regions around the world.

As a key component of the plan, Mayor de
Blasio announced the city’s new “retrofit accelerator” plan,
which aims to upgrade 20,000 private buildings, making up 15% of
citywide built square footage. The city will accomplish
this by requiring buildings of more than 25,000 square feet to
comply with energy efficiency guidelines -- a more stringent
standard than the previous 50,000 foot threshold. Some
estimates put the capital-improvement tab at around $ 1
billion. Although private-sector residential and
commercial owners and developers will bear the cost of these
improvements, the city estimates that they will be offset by
$8.5 billion in energy-cost savings over the next 10 years
(including operating cost savings, new economic development,
increasing property values, and the creation of 3,500 new jobs
in construction and energy services).

The Greener, Greater Buildings Plan (GGBP),
another large component of Mayor de Blasio’s initiative, is the
most comprehensive set of energy efficiency laws in the U.S.,
targeting NYC’s largest existing buildings which constitute half
its built square footage and 45% of citywide carbon
emissions. For these buildings, the policies require an
annual benchmarking of energy and water use with public
disclosure; an audit and retro‐commissioning every ten years;
for non‐residential spaces, upgrades for lighting to meet the
energy code, and the installation of electrical meters or
sub‐meters for large tenant spaces.

Much of GGBP is about energy transparency;
however, retro‐commissioning and lighting upgrades have also
been broadly mandated in the policy because they are extremely
cost‐effective measures that will quickly start to accrue
savings for building owners. When these small benefits are
aggregated at the city scale, they add up to tremendous
savings. GGBP is estimated to cost $5.2 billion for
building owners while saving $12.2 billion, for a net savings of
$7 billion. (Note that these savings are direct savings
that result from reduced energy expenditures. They do not
include the health savings resulting from cleaner air, nor do
they include avoided costs of energy infrastructure that can be
quite substantial.)

How to complyIn order to comply with Local Law 84 (LL84),
which is at the heart of the GGBP and Mayor DeBlasio’s larger
initiative, owners of buildings with entire lots of 25,000
square feet or more (now decreased from 50,000 sq. ft or more)
must use the free online Energy Star benchmarking tool,
Portfolio Manager, to report energy and water use to the city by
May 1st of each year and continue the procedure
quarterly.

Violations for Failed ComplianceThe Department of Buildings (DOB) is
authorized to issue a violation for any listed building that has
not provided a benchmarking report. Failure to benchmark
by May 1st will result in a violation and penalty of $500.
Continued failure will result in additional violations on a
quarterly basis and a penalty of $500 per quarter with a maximum
of $2,000. Although these penalties may seem menial
to some building owners, the related energy cost and tax savings
provide a more compelling reason to update.

The Federal Energy Efficiency Tax
IncentivesPursuant to Energy Policy Act (EPAct) of
2005, Code Sec. 179D, commercial property owners or primary
designers in government projects making qualifying
energy-reducing investments in their new or existing locations
can obtain immediate tax deductions of up to $1.80 per square
foot.

In order to qualify for the deduction the
building should show a combined energy cost savings of 50% based
on the envelope, lighting and HVAC improvements.
Many companies who upgrade their lighting systems are eligible
for significant tax incentives. The following chart
demonstrates the potential tax and net savings.

The following chart defines the expiration
dates associated with the various Alternative Energy Tax
Credits.

Specified
Energy Property

Credit
Termination Date

Applicable Percentage of
Eligible Cost Basis

Large Wind

Jan 1,
2013

30%

Closed-Loop
Biomass Facility

Jan 1,
2014

30%

Open-loop
Biomass Facility

Jan 1,
2014

30%

Geothermal
under IRC sec. 45

Jan 1,
2014

30%

Landfill
Gas Facility

Jan 1,
2014

30%

Trash
Facility

Jan 1,
2014

30%

Qualified
Hydropower Facility

Jan 1,
2014

30%

Marine
& Hydrokinetic

Jan 1,
2014

30%

Solar

Jan 1,
2017

30%

Geothermal
under IRC sec. 48

Jan 1,
2017

10%*

Fuel Cells

Jan 1,
2017

30%**

Microturbines

Jan 1,
2017

10%***

Combined
Heat & Power

Jan 1,
2017

10%

Small Wind

Jan 1,
2017

30%

Geothermal
Heat Pumps

Jan 1,
2017

10%

In addition to the tax credit, the
government also provides other significant incentives.For example, the
taxpayer may accelerate depreciation and claim deductions over a
period of just five years even though the typical useful life of
the system is significantly longer.Thus, the taxpayer may
recover costs sooner than most typical depreciation schemes.Moreover, the purchase
price of the system for depreciation purposes is only reduced by
half the amount of the tax credit even though the taxpayer
received a dollar for dollar reimbursement.These two combined
benefits not only reduce tax liability but also accelerate the
rate of return on solar investments.

Conclusion

In a major market with the one of the
highest energy costs in the nation, the discussed incentives
coupled with energy cost savings and energy tax incentives
provide a compelling favorable economic return for applicable
energy projects. Although New York State has a long way to
go before reaching optimal energy efficiency, progress is
underway. Former Illinois Senator
Everett Dirkson once said “A billion here and billion
there and pretty soon you’re talking real money.”